CFAH

With the Case-Shiller index for Bay Area home values, which is a lagging indicator, having shed 13 percent since May and headed down, the average price per square foot of the homes which are in contract in San Francisco, which is a leading indicator, has just dropped under $860 per square foot, which is down 15 percent since May to its lowest level in five years and shouldn’t catch any plugged-in readers by surprise.

At the same time, pending home sales remain down 40 percent on a year-over-year basis in San Francisco, despite the drop in pricing and an average of 30 percent more inventory on the market over the past quarter, including twice as many single-family homes, year-over-year.

Comments from Plugged-In Readers

  1. Posted by Oscar

    What was the average price per square foot during the 2010-2014 lows? I wonder if we are heading close to that.

    • Posted by DAA

      The bottom was in the $500-600PPSF range. I paid just over $600PPSF in 2011, slightly higher than average being that it was a small condo.

  2. Posted by Jeffrey W. Baker

    How do you get the price of pending deals?

  3. Posted by Ohlone Californio

    “What was the average price per square foot during the 2010-2014 lows? I wonder if we are heading close to that.”

    What we are looking at here is going to be a percentage based upon a mind-numbing runup versus a correction. It’s going to be a point in time after the post pandemic / easy cash appreciation of 2021 and then on into a month from spring 2022. That’s the top. Then the “bottom” will be some month in 2023 let’s say where the Fed-engineered depreciation nadir lands. That difference, based upon both sides of the Fed’s reaction to a black swan event, taking the most extreme months will be the figure. By the time we learn what it was, real estate will again probably already be $1100/ft on average in San Francisco.

    Because the average dollars per square feet for San Francisco single family homes in 2014 ?( And I note you incorrectly lumped 2014 in with what should have been 2009 – 2012?. We saw a stark break north in 2013 and then again in 2014.) The average for SFRs in 2014 was $715.26/ft. In 2013 it was $628.48.ft. In 2012 it was $512. 09/ft.

    This calendar year we’ve seen an average of $1093.71 /ft thus far. That’s baking in the market shift which began halfway through this year. So in order to get to the lows of even 2014 we’d need to see a market correction of 35 %. That’s simply not going to happen.

    • Posted by jimbo

      i think we will get down to 800/sq ft, +/- 5%, but dont see it going much lower. there are just too many cash buyers or people who put >40% down to have mortgage rates drop sales prices by >35%

  4. Posted by Fred Mack

    What’s that old saying about believing your own BS?

    • Posted by Ohlone Californio

      Was that directed at me or something? I showed how the “2010 – 2014 lows” take is a probably a nonstarter. I mean, 2007 vs 2009 was a 15 percent shift. But feel free to break down how a 35 percent shift will happen with your bad self.

      • Posted by cave_dweller

        If cost of borrowing has gone up 100%+ – why won’t prices fall -35%?

        • Posted by L&E

          Because borrowing costs are just one of many factors that affect home prices. It is not even clear how big a factor they are as compared to incomes, stock market performance, population growth, unemployment rates and many others. To illustrate, mortgage rates almost fell by half from December 2018 to December 2020, but SF housing prices did not double during that period. And mortgage rates went up quite a bit from late 2012 to late 2018 but SF home prices also rose substantially during that period.

          • Posted by cave_dweller

            In a heavily (entirely) credit based economy such as ours, isn’t credit the primary driver of prices/economic activity? Wage Incomes, stock market performance, industrial productivity, unemployment and even population growth are all dependent on credit availability.

            When credit is cheap – RE borrowers may not borrow even if the inputs are plentiful because of timing risk in future.
            When credit is expensive – borrowers may not borrow because of interest risk now and timing risk in future.

        • Posted by Ohlone Californio

          I understand that line of thought, but I’d suggest that the reason why is it’s much stickier than that for many reasons. Have you considered what 30 year fixed apr rates were in 2005-2007? They’re similar to where we are now.

        • Posted by Brahma (incensed renter)

          Even if it would be a welcome event in terms of housing affordability for people currently priced out, I think it’s going to be almost impossible for prices to fall 35 percent in the next few years.

          In the aftermath of the so-called GFC, prices nationally fell by an amount in that ballpark, but we had lots of forced selling via foreclosures, acceptability of short sales, etc. As I have said here previously, most homeowners with a mortgage have a rate below today’s prevailing level, so the forced selling isn’t going to be such a force on transaction volume.

          Maybe cave_dweller has in mind some idiosyncratic risk specific to San Francisco, but that would have to do a lot of work to produce a 35 percent drop.

          • Posted by cave_dweller

            -35% doesn’t have to be abrupt and immediate. RE price adjustments can lag by a year.
            -15% is already currently in play. It remains to be seen if and when the additional -20% would happen.

          • Posted by two beers

            One idiosyncratic risk specific to San Francisco that I’ve belabored here for years here is that our economy has become concentrated on “tech” businesses and jobs. Whereas most cities have a diversified business and jobs base, enabling them to better weather downturns, I think we will suffer the consequences of greedily and foolishly abandoning a resilient economy for a shiny, concentrated, maximum-profit-extraction economy.

          • Posted by cave_dweller

            San Francisco’s Unspoken Idiosyncratic Risk: Its no longer a viable place for dating/mate finding.
            Tech-boom in SF was predicated on relieving unfavorable mating environment in the Silicon Valley.
            The attendant RE-boom was layered atop increasing rents from this Tech-boom.
            Since at least mid-2000s it wasn’t financially feasible for many to raise a family in SF.
            SF was (and still is) never a place for tech-inputs – excluding Bio-tech.

            With tech-decentralization of last 2 years and worsening governance/crime/quality of life issues – I am not at all convinced SF will recover its dating glamor in the near foreseeable future (4-5 yrs).

  5. Posted by Fred Mack

    My thought was that “probably” is doing some heavy lifting in your initial post. You equate 2023 with 2012 in terms of a cycle. Maybe it’s more like 2009? Who knows?

    • Posted by Ohlone Californio

      Man, I said probably. So I tacitly acknowledged speculation. You came in pretty hot with the old saying BS line. Heh. Anyway, what I’m basing that off of is the reading I’m doing about when inflation curbing might be deemed sufficient, when rates might get lower, what to expect next year, etc.

      I don’t really rate equating this curbing of unprecedented appreciation with a certainly obvious massive sell off, triggering massively lower prices. I mean, another thing is so very many people took advantage of the super low 30 year rates that were on offer the past couple years. They’re sitting pretty, you know?

      I mean, it’s all sorts of things. San Francisco as a municipality has been rank awful in glaring places. So that’s a thing for sure. People are leaving. People will be leaving. Some of them will own homes and they’ll sell for less than they might have gotten in May 2022. Many others will stick around. It’s still the big city of a world class region, etc etc.

      But the flipside of SF’s bureaucracy being so bad at their jobs? They’ve created housing scarcity. Particularly when it comes to what I’ve stayed talking about here, and that’s single family homes. I think a lot of people will have read the Chronicle article from two weeks ago. I mean, it’s really crazy what has gone on.

      So where does SF engineering housing scarcity fall versus SF engineering unpleasant living situations in various neighborhoods? I don’t know that. I wish I did. And then meanwhile, not only has it taken forever to do a simple remodel in order to bring a nice, existing house with a fresh look to market. No, not only that, but actual hard costs for builders have gotten slammed by inflation just like everything else. Plus CA keeps jacking up worker’s comp. It’s brutal.

      But it’s looking like there will be less nice houses for sale and they’ll have cost more to create, thanks to time and all manners of construction and also supply chain issues, which still exist. So there’s a lot of reasons to think that there’s not going to be any critical mass of cheap selling off achieved any time soon.

      That said, many more condos were created over the past four or five years. And a lot of them are in parts of town where the SF powers that be, and/or WFH have messed up for the time being. That will be a drag on values for sure.

      I don’t know. Lots of moving parts. It can’t be reduced so simply to interest rates.

  6. Posted by Fred Mack

    There, you fixed it. With that, I’d bet on a broad valley of indeterminate width and depth for the coming few years in SF.

  7. Posted by [soccermom]

    I do not think that real estate prices can keep falling forever while the prices of everything else in the economy keep going up. Especially since we have a national housing shortage (namelink).

    • Posted by Fred Mack

      Tell Elon.

    • Posted by cave_dweller

      Why can’t money move from RE to other things in economy that keep going up?
      If search for yield is the motive – why would speculation in RE be more ‘sticky’ than other venues which may be more liquid and offer better yield?

      • Posted by Fred Mack

        Exactly. None of the various ingredients that fueled the last two SF real estate booms are anywhere on the horizon. Things could well gas off here for years. A 35% drop from the last peak would bring a 30 year chart back in line with more typical appreciation.

        • Posted by Ohlone Californio

          Somehow the absence of stark growth gets interpreted as collapse, eh? Fine. I’m done here.

          • Posted by cave_dweller

            I don’t think anyone is interpreting anything as a collapse. Just pointing out that speculation will correct/adjust – revert to mean. This correction has to happen to remove excess (and speculative) debt from the system.

          • Posted by Ohlone Californio

            Well, no, as 35 percent would be a collapse. Nor do I think you’re taking into account all the various appreciation cycles either. It’s not singularly the post-pandemic very short drastic boom, or the broader 15-19 cycle either. There was ’96-2000, there was the post dot com crash 2002-2004 period, there was the easy credit 2005 – fall 2008 boom (which, again had 30 year fixed interest rates similar to now), and there was the post crash 2012-2014 recovery period. They all had sustained appreciation and for differing reasons. So why is it, you’re supposing this particular market correction will make them all go back to something resembling “typical” on a chart. Why? The world changed during this period, SF changed, and the Bay Area workforce changed too.

          • Posted by Ohlone Californio

            Or, to put it more succinctly, the very 30 year period we reference here is marked by long periods of gain versus shorter periods of correction/retraction. What’s anomalous in the 30 years is the massive spike of 2021 to spring ’22. To me it’s disingenuous to include 2015-2019 into a correction for ’21 to spring ’22. Because those years resemble other growth cycles within the 30 year chart. I feel as if the next person who makes that case will be the first one.

          • Posted by Michael

            I assume you’re talking your book but the “absence of stark growth” period has been absent for nearly a year. Values have dropped over the past few quarters, the only question is how far they’ll drop or collapse.

          • Posted by Ohlone Californio

            Indeed, I was talking about market trends, bored a bit over the holidays. Your take about the absence of stark growth for nearly a year is incorrect. Examine the first two quarters of 2022. A decline has been tacitly acknowledged, and discussed. Your insertion of collapse has also been discussed.

        • Posted by wilson

          One data point to re-frame this is that the last apple posted here already dropped 29% in nominal terms since 2018. And inflation has cumulatively been 18.6% since then.

          One data point isn’t an average, but it certainly does point out how a 35% drop could happen. People simply would pay less now then they did at the peak.

          It also points out a bit how useless it is to look at nominal (not inflation adjusted) prices in times of high inflation. If inflation runs hot for long enough a 35% nominal drop may very well never happen, simply because with the cumulative rate of inflation that could represent a truly epic collapse in real prices.

          Looking for a 35% drop in real prices hardly seems out of the question. In past RE downturns inflation did much of the work of bringing prices down, and it looks like another apple was just posted with a 17.6% nominal drop since 2014, with 25.8% inflation since then.

          • Posted by Ohlone Californio

            You say that apple certainly does point out how a 35% drop could happen. And indeed, we were talking about 35% on average for $/ft. So let me ask you something. Did you not ask yourself whether anything has changed in that mid-Market neighborhood since 2018? It’s a fair question, because the point re 35% was average $/ft.

      • Posted by Brahma (incensed renter)

        Money can and does move from real estate to other areas of the economy, but not all of it. To ask the question “why would speculation in real estate be more ‘sticky’ than other venues which may be more liquid and offer better yield?” is almost to answer it.

        In other asset classes, transactions are faster to complete than with real estate, and transaction costs are lower in almost all those asset classes. There are fewer/less frequent transactions.

        People choose real estate because they believe it to be uncorrelated with other asset classes, or those people already are overexposed to other asset classes (such as the U.S. stock market) and want to diversity their overall portfolio, in some cases to take advantage of preferential tax treatment. Also, many people are not optimal yield maximizers. Owning real estate confers some hedonic benefits that owning stock in companies or other asset classes does not.

        Lastly, as I’ve said here before, S.F. real estate appears to be a less volatile investment than the U.S. stock market in most time periods. The 20% decline in home values during and immediately after the so-called Global Financial Crisis was roughly less than half the draw down in the stock market around the same time period.

        • Posted by wilson

          “People choose real estate because ….”

          People also chase past returns. Gains draw people in and losses drive people out. You need look no further then the crypto craze to see that people would flock to put billions of real dollars into some asset literally backed by nothing only because its market price had shot up in the past.

          And remember leverage. Leverage magnifies the gains on the way up, but also makes the downtrend all the more painful. A 20% downturn meeting a 20% down payment is nothing to be taken lightly.

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